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Seeking safety: The relation between CEO inside debt holdings and the riskiness of firm investment and financial policies

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  • Cassell, Cory A.
  • Huang, Shawn X.
  • Manuel Sanchez, Juan
  • Stuart, Michael D.
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    Abstract

    CEO inside debt holdings (pension benefits and deferred compensation) are generally unsecured and unfunded liabilities of the firm. Because these characteristics of inside debt expose the CEO to default risk similar to that faced by outside creditors, theory predicts that CEOs with large inside debt holdings will display lower levels of risk-seeking behavior (Jensen and Meckling, 1976). Consistent with the theoretical predictions, we find a negative association between CEO inside debt holdings and the volatility of future firm stock returns, R&D expenditures, and financial leverage, and a positive association between CEO inside debt holdings and the extent of diversification and asset liquidity. Collectively, our results provide empirical evidence suggesting that CEOs with large inside debt holdings prefer investment and financial policies that are less risky.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 103 (2012)
    Issue (Month): 3 ()
    Pages: 588-610

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    Handle: RePEc:eee:jfinec:v:103:y:2012:i:3:p:588-610

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Inside debt; Pensions; Deferred compensation; CEO incentives; Risk-seeking behavior;

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    Cited by:
    1. Eisdorfer, Assaf & Giaccotto, Carmelo & White, Reilly, 2013. "Capital structure, executive compensation, and investment efficiency," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 549-562.
    2. Kabir, Rezaul & Li, Hao & Veld-Merkoulova, Yulia V., 2013. "Executive compensation and the cost of debt," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2893-2907.

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